**Exhibit 13.1**
| **INTERNATIONAL** |
|-------------------|
| ** **        | **ALUMINUM** |
| ** **        | **CORPORATION** |
|                   |  |  |

 

 

**2006 Annual Report**

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**COMPANY PROFILE**

**INTERNATIONAL ALUMINUM CORPORATION** is an integrated building productsmanufacturer of diversified lines of quality aluminum and vinyl products.  The Company is headquartered in MontereyPark, California, and has approximately 1,600 employees.  Operations are conducted through twelve NorthAmerican subsidiaries.  The Company’sprimary Internet website is located at www.intlalum.com.

**PRODUCTS BY SEGMENT**

**COMMERCIAL**— Curtainwalls, window walls, slope glazed systems, storefront framing,entrance doors and frames, commercial operable windows, including products forstorm and blast-resistant applications; interior officefronts, officepartitions and interior doors and frames for the commercial building and tenantimprovement markets.  Product informationis available at www.usalum.com and www.racointeriors.com.

**RESIDENTIAL**— Extensive lines of windows and patio doors manufactured from vinyl andaluminum for the residential building and remodeling markets.  Product information is available atwww.intlwindow.com.

**ALUMINUM EXTRUSION**— Mill finish, anodized, painted andfabricated aluminum extrusions.  Productinformation is available at www.intlextrusion.com.

**CONTENTS**
| Financial Highlights                                                                        | 1  |
|---------------------------------------------------------------------------------------------|----|
| Letter to Shareholders                                                                      | 2  |
| Selected Financial Data                                                                     | 4  |
| Management’s Discussion and Analysis of Financial  Condition and Results of Operations | 4  |
| Quarterly Financial Data                                                                    | 10 |
| Certifications                                                                              | 11 |
| Management’s Report on Internal Control Over  Financial Reporting                      | 11 |
| Report of Independent Registered Public Accounting  Firm                                    | 12 |
| Consolidated Financial Statements                                                           | 14 |
| Notes to Consolidated Financial Statements                                                  | 18 |
| Corporate Information                                                                       | 27 |
| Subsidiaries by Segment                                                                     | 28 |

** **

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**FINANCIAL HIGHLIGHTS**

Fiscal Years Ended June 30, 2006, 2005 and 2004
| ** **                                          | ** ** | **2006**    | ** **  | **2005**    | ** ** | **2004**    | ** ** |
|-----------------------------------------------------|------------|-------------|-------------|-------------|------------|-------------|------------|
| **Operating Results:**                              |       |        |        |        |       |        |       |
| ** **                                          |       |        |        |        |       |        |       |
| Net sales                                           |       | $           | 280,826,000 |        | $          | 251,588,000 |       | $ | 213,034,000 |   |
|                                                |       |        |        |        |       |        |       |   |   |   |
| Income from  continuing operations                  |       | $           | 16,244,000  |        | $          | 12,942,000  |       | $ | 6,529,000 |   |
| Income from  discontinued operations                |       | —      |        | —      |       | 129,000     |       |
| Net income                                          |       | $           | 16,244,000  |        | $          | 12,942,000  |       | $ | 6,658,000 |   |
| ** **                                          |       |        |        |        |       |        |       |
| **Financial Data:**                                 |       |        |        |        |       |        |       |
| ** **                                          |       |        |        |        |       |        |       |
| Net cash  provided by operating activities          |       | $           | 18,237,000  |        | $          | 5,199,000   |       | $ | 12,146,000 |   |
| Capital  expenditures                               |       | 6,358,000   |        | 4,246,000   |       | 3,482,000   |       |
| Cash and cash  equivalents                          |       | 20,446,000  |        | 12,437,000  |       | 15,964,000  |       |
| Working capital                                     |       | 88,384,000  |        | 77,554,000  |       | 67,860,000  |       |
| Long-term debt                                      |       | —      |        | —      |       | —      |       |
| Shareholders’  equity                          |       | 133,657,000 |        | 120,503,000 |       | 111,206,000 |       |
|                                                |       |        |        |        |       |        |       |
| **Per Share Data:**                                 |       |        |        |        |       |        |       |
| ** **                                          |       |        |        |        |       |        |       |
| Continuing  operations — Diluted               |       | $           | 3.78        |        | $          | 3.04        |       | $ | 1.54 |   |
| Income from  discontinued operations — Diluted |       | —      |        | —      |       | .03         |       |
| Net income —  Diluted                          |       | $           | 3.78        |        | $          | 3.04        |       | $ | 1.57 |   |
| Dividends  declared                                 |       | $           | 1.20        |        | $          | 1.20        |       | $ | 1.20 |   |
| Book value at  year end                             |       | 31.04       |        | 28.22       |       | 26.20       |       |
| Market price at year  end                           |       | 38.00       |        | 31.95       |       | 29.10       |       |

#  

1

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# **TO OUR SHAREHOLDERS**

# Fiscal 2006 was an outstanding year for International AluminumCorporation.  We continued to benefitfrom a strong Residential housing market and the resurgence of the Commercialbuilding market.  Our sales revenue was arecord $280,826,000, a 12% increase from our previous high of $251,588,000 forfiscal 2005.  Net income was a record$16,244,000 or $3.78 per share, a 24% increase over the $3.04 for fiscal 2005.

# **Residential Products**

# Our Residential Products Group finished the year with a solid income fromoperations of $15.0 million accompanied by a record sales achievement of $85.7million.  Buoyed by an aggressive newconstruction market for most of the past year, single-family housing attainedyet another record level for new housing starts.  Also sustaining the upsurge, the homeimprovement sector has continued to grow at a moderate rate and is expected toexceed the $300 billion mark in calendar 2006(1).  These factors, coupled with the stillaffordable cost of financing a remodeling project resulted in another solidyear for this segment of our business.

# Design and development of new products and customer-friendly orderplacement systems are important means to achieve continued growth.  During the year we developed a number of newproducts that have had a favorable impact on our sales.  In addition, we recently signed an agreementwith a major chain of Home Improvement Centers to load our price book intotheir special order electronic catalog. We are midway through this process and anticipate an increase in specialorder business from this new sales tool.

# We were also successful in protecting our margins by implementing asignificant price increase during the year to offset rising material costsresulting from shortages in aluminum and vinyl resins and higher costsassociated with the manufacture of glass. As always, customer satisfaction is our priority and we continue tostrive to provide our customers with the highest product quality and valuealong with the best delivery performance available in the market.

# **Commercial Products**

# The Commercial Products Group posted record income from operations of$19.1 million generated from excellent sales of $135.0 million.  As the year progressed, overall performancesteadily improved, especially during the fourth quarter of the year.  This was primarily due to a strong non-residentialconstruction market, price increases and market share growth.  As a result, profits increased 23% on salesgrowth of 9%.

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# Strategic geographic expansions, coupled with the introduction of newproducts, continue to be a major focus. New regional fabrication centers located in Phoenix, Arizona andOrlando, Florida are slated to open in Fall 2006.  The upgrading of manufacturing equipment anddevelopment of continuous improvement processes will keep us efficient and costeffective as we strive for continued growth.

# **Aluminum Extrusions**

# Although this group continues to perform below expectations, theimprovements implemented during fiscal 2006 began showing positive results asIncome from Operations increased by 167% over the prior year.  Competitive price pressure, including the continuedpenetration of lower-priced offshore suppliers, along with escalating domesticenergy, transportation and environmental compliance costs, continue tochallenge our extrusion business.

# Aluminum raw material prices rose over most of the fiscal year reachingtheir peak in May.  Driven primarily bythe rising aluminum market prices, sales revenue for the group, includingshipments to internal customers, rose by 14% while total tonnage shippedincreased 4.2%.

# The improvements put in place during 2006, along with additionalimprovements planned for 2007 are anticipated to move the Group closer tomeeting performance expectations. Executive management will continue to work closely with Group personnelto execute the planned improvement initiatives.

# **Financial Condition**

# Our financial condition continues to be excellent as we concluded theyear with more than $20 million in cash and cash equivalents, in excess of $88million in working capital, a current ratio of 3.6 and no long-term debt.  Capital expenditures for fiscal 2007 arecurrently projected to be $6.4 million, approximately the same level as fiscal2006 and slightly higher than our current non-cash depreciation charges.

|                         |   |                                       |   |
|-------------------------|--------|---------------------------------------|--------|
| Cornelius C. Vanderstar |   | Ronald L. Rudy                        |
| Chairman of the Board   |   | President and Chief Executive Officer |
|                    |   |                                  |
| September 2, 2006       |   |                                  |

#  

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# (1)  Data provided by the Home Improvement ResearchInstitute/Global Insight.

3

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**SELECTED FINANCIAL DATA**
| **Year Ended June 30** | ** ** | **2006**    | ** **  | **2005**    | ** ** | **2004**    | ** ** | **2003**    | ** **  | **2002**    | ** ** |
|---------------------------------------|------------|-------------|-------------|-------------|------------|-------------|------------|-------------|-------------|-------------|------------|
|                                  |       |        |        |        |       |        |       |        |        |        |       |
| **Sales by Segment**                  |       |        |        |        |       |        |       |        |        |        |       |
| Commercial                            |       | $           | 134,559,000 |        | $          | 123,034,000 |       | $           | 98,789,000  |        | $          | 97,345,000 |   | $ | 108,510,000 |   |
| Residential                           |       | 85,289,000  |        | 74,131,000  |       | 64,947,000  |       | 53,586,000  |        | 44,352,000  |       |
| Aluminum  Extrusion                   |       | 60,978,000  |        | 54,423,000  |       | 49,298,000  |       | 41,618,000  |        | 38,567,000  |       |
| Total net sales                       |       | $           | 280,826,000 |        | $          | 251,588,000 |       | $           | 213,034,000 |        | $          | 192,549,000 |   | $ | 191,429,000 |   |
|                                  |       |        |        |        |       |        |       |        |        |        |       |
| **Earnings**                          | ** ** | ** **  | ** **  | ** **  | ** ** | ** **  | ** ** | ** **  | ** **  | ** **  | ** ** |
| Gross profit                          |       | $           | 65,299,000  |        | $          | 58,111,000  |       | $           | 43,998,000  |        | $          | 35,350,000 |   | $ | 33,999,000 |   |
|                                  |       |        |        |        |       |        |       |        |        |        |       |   |   |   |   |   |
| Continuing  operations                |       | $           | 16,244,000  |        | $          | 12,942,000  |       | $           | 6,529,000   |        | $          | 4,426,000 |   | $ | 1,485,000 |   |
| Discontinued  operations*             |       | —      |        | —      |       | 129,000     |       | (1,697,000  | )           | (1,533,000  | )          |
| Cum. effect of  acctg. change         |       | —      |        | —      |       | —      |       | —      |        | (7,935,000  | )          |
| Net income  (loss)                    |       | $           | 16,244,000  |        | $          | 12,942,000  |       | $           | 6,658,000   |        | $          | 2,729,000 |   | $ | (7,983,000 | ) |
|                                  |       |        |        |        |       |        |       |        |        |        |       |
| Per share:                            |       |        |        |        |       |        |       |        |        |        |       |
| Continuing  operations                |       | $           | 3.78        |        | $          | 3.04        |       | $           | 1.54        |        | $          | 1.04 |   | $ | .35 |   |
| Discontinued  operations*             |       | —      |        | —      |       | .03         |       | (.40        | )           | (.36        | )          |
| Cum. effect of  acctg. change         |       | —      |        | —      |       | —      |       | —      |        | (1.87       | )          |
| Net income  (loss) — diluted     |       | $           | 3.78        |        | $          | 3.04        |       | $           | 1.57        |        | $          | .64 |   | $ | (1.88 | ) |
| Dividends  declared                   |       | $           | 1.20        |        | $          | 1.20        |       | $           | 1.20        |        | $          | 1.20 |   | $ | 1.20 |   |
|                                  |       |        |        |        |       |        |       |        |        |        |       |
| **Financial Data at Year End**        | ** ** | ** **  | ** **  | ** **  | ** ** | ** **  | ** ** | ** **  | ** **  | ** **  | ** ** |
| Cash and cash  equivalents            |       | $           | 20,446,000  |        | $          | 12,437,000  |       | $           | 15,964,000  |        | $          | 12,570,000 |   | $ | 3,495,000 |   |
| Working capital                       |       | 88,384,000  |        | 77,554,000  |       | 67,860,000  |       | 62,929,000  |        | 58,057,000  |       |
| Total assets                          |       | 172,948,000 |        | 151,631,000 |       | 141,882,000 |       | 133,243,000 |        | 132,724,000 |       |
| Long-term debt                        |       | —      |        | —      |       | —      |       | —      |        | —      |       |
| Shareholders’ equity             |       | 133,657,000 |        | 120,503,000 |       | 111,206,000 |       | 109,536,000 |        | 110,805,000 |       |

 

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* For further details relating to discontinuedoperations refer to Note 8.

**MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

# **SignificantChanges in Results of Operations**

**2006 vs. 2005**

*GeneralOverview*

Net sales for fiscal 2006 increased $29,238,000 or11.6% from fiscal 2005.  All Groupsachieved increased sales during 2006 compared to the prior year.  Gross profit remained relatively unchanged at23.3% of sales in 2006 compared to 23.1% in 2005.  Reductions to cost of sales percentagesachieved by the Commercial Products and Aluminum Extrusion Groups during fiscal2006 were partially offset by slightly increased cost of sales percentagesincurred by the Residential Products Group. Selling, general and administrative expenses increased $2,776,000,although as a percentage of net sales decreased to 14.3% of sales in fiscal2006 compared to 14.8% in fiscal 2005.

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The Company includes product costs, inbound freight,purchasing, receiving, inspection, internal transfer, warehousing and othercosts of the Company’s distribution network in cost of goods sold, therebyreducing gross profit by these amounts. Cost of sales and gross profit as a percentage of sales for the Companymay not be comparable to those of other companies in our industry since othercompanies may record purchasing, warehousing and distribution costs as selling,general and administrative expense.

The contribution to these results by eachsegment is discussed below.

*CommercialProducts*

Sales of the Commercial Products Group increased$11,524,000 or 9.4% compared to the 2005 year, bolstered to a significantextent by a very strong fourth quarter. This gain reflects increased commercial construction activity togetherwith increased sales prices and expanded geographic market penetration.  Gross profit improved to 25.9% in fiscal 2006versus 24.3% for last year.  Despiteexperiencing increased costs for aluminum and energy surcharges, this Group wasable to achieve slightly lower material cost percentages for the current yearcompared to last year.  Also contributingto the lower cost of sales percentages were decreased labor and overhead costpercentages compared to last year reflecting cost containment efforts coupledwith volume efficiencies as a result of the aforementioned salesincreases.  Selling, general andadministrative expenses increased $1,350,000, and as a percentage of sales infiscal 2006 was 11.8%, the same as last year. This increase was mainly attributable to additional employment and salesrepresentation costs of $1,239,000 relating to the increased sales.

*ResidentialProducts*

Sales of the Residential Products Group increased$11,158,000 or 15.1% compared to the 2005 year. Consumer demand, although tapering off in the fourth quarter, continuedto stimulate new home construction, re-sales of existing homes and homeimprovement spending in the areas served by this group.  New product development, aggressivepromotional and sales efforts and increased sales prices also contributed tothe increase.  Cost of sales as apercentage of sales increased in fiscal 2006 to 69.8% versus 68.7% lastyear.  Higher material cost percentageswere incurred mainly due to absorption of higher aluminum and energy surchargecosts.  This group also experienced a slightincrease in labor cost percentages as additional labor efficiency expected fromthe increased volume was offset by higher costs incurred for overtime andtemporary help in order to meet on-time delivery commitments.  Partially offsetting these increases weredecreased overhead cost percentages achieved from production efficienciesattained from the higher sales volume. Selling, general and administrative expenses increased $1,401,000, andas a percentage of sales in fiscal 2006 was 12.7%, the same as last year.During fiscal 2006, this group incurred $1,026,000 in additional legal costsprimarily relating to defense of a product liability lawsuit that was certifiedas a class-action in November 2005.  TheCompany expects that a portion of these legal expenses may be reimbursed by ourinsurers.  Additional increases of$539,000 were incurred for employment costs related to the increase insales.  Partially offsetting the increasesin fiscal 2006 were decreases of $272,000 and $114,000, respectively, relatingto workers’ compensation and general liability policies.

*AluminumExtrusion*

Sales to outside customers of the AluminumExtrusion Group increased $6,556,000 or 12.0% compared to the 2005 year.  During fiscal 2006 the Group benefited froman increase in selling prices and a modest 2.6% increase in net tonnage shippedto outside customers.  Current year salesto outside customers at our California facility increased by $4,931,000 or17.1% compared to last year.  Increasedselling prices coupled with increased demand from existing and new customers,improved lead times, product quality and on-time delivery performance fueledthe gain at this facility.  Total tonnageshipped to outside and internal customers improved by 3.4% for the year,although tonnage shipped to outside customers that increased by 6.9% waspartially offset by a decline in tonnage shipped to internal customers.  Current year sales to outside customers atour Texas facility increased by $1,625,000 or 6.4% compared to last year, asincreased selling prices more than offset a decline of 2.4% in tonnage shippedto outside customers.  Loss of volumefrom key outside customers due to the recent period of volatile pricefluctuations, a switch to alternate or offshore suppliers and planned customerinventory reductions contributed to the tonnage decrease. Sales and tonnagegains were also hampered due to reduced shipments to the sales areas impactedby the hurricanes suffered during the December quarter in the Gulf Coastregion, as well as reductions in shipments to the Florida customer base due toinsufficient margins.  Despite theaforementioned decline in tonnage shipped to outside customers, total tonnageshipped from our Texas facility increased 5.0% as shipments to internalcustomers increased a substantial 10.6% reflecting strong demand from ourCommercial Group.  Cost of sales for theGroup as a percentage of sales was 95.4% for

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fiscal 2006, an improvement from 96.1% inthe prior year.  The improvement wascontributed solely by our Texas facility, which achieved a cost of salespercentage of 93.4% this year versus 94.8% in fiscal 2005, as our Californiaplant did not improve upon the 97.8% posted last year.  Due to the highly competitive marketplace, sellingprices were increased directly in line with the increased cost of aluminum,resulting in increased material cost percentages for the current year.  During fiscal 2006, labor and overhead costpercentages at both facilities declined as a result of the increased sellingprices coupled with efficiencies achieved as a result of increased totalvolume.  The impact of increased utilitycosts was lessened due to the implementation of energy surcharges levied on ourcustomers during the year.  Selling,general and administrative expenses decreased slightly by $28,000, and as apercentage of sales decreased to 2.7% of sales compared to 3.1% last year.

*Corporate*

General and administrative expenses increasedslightly by $53,000, and as a percentage of consolidated net sales decreased to3.5% of net sales in fiscal 2006 compared to 3.9% in 2005.  The negligible increase includes twooffsetting factors.  The prior yearbenefited from a recovery of $265,000 for then-current and prior year legalfees that was recorded as a result of a settlement.  The current year realized a reduction of$281,000 for costs related to complying with the internal control requirementsof the Sarbanes-Oxley legislation.

The increase in interest income relates toincreased funds available for investment during the year combined with higherrates of return compared to last year.

The effective tax rate in fiscal 2006 was36.4% compared to 38.0% last year.  Thedecline was primarily attributable to the Domestic Manufacturers Deduction,which contributed to 1% of the decline in the rate, available as a result ofthe enactment of the American Jobs Creation Act of 2004.  We also experienced a decrease of Federalincome tax reserves resulting from settlement of an Internal Revenue ServiceAppeals case for tax years 1997 and 1999 through 2004.

**2005 vs. 2004**

*GeneralOverview*

Net sales for fiscal 2005 increased $38,554,000 or18.1% from fiscal 2004.  All Groupsachieved increased sales during 2005 compared to 2004.  Gross profit increased to 23.1% of sales infiscal 2005 compared to 20.7% in fiscal 2004. All Groups realized reductions, to varying degrees, in their cost ofsales percentages during fiscal 2005 compared to fiscal 2004.  Selling, general and administrative expensesincreased $3,763,000, but declined as a percentage of net sales to 14.8% ofsales in fiscal 2005 compared to 15.8% in fiscal 2004.

The Company includes product costs, inbound freight,purchasing, receiving, inspection, internal transfer, warehousing and othercosts of the Company’s distribution network in cost of goods sold, therebyreducing gross profit by these amounts. Cost of sales and gross profit as a percent of sales for the Company maynot be comparable to those of other companies in our industry, since otherentities may record purchasing, warehousing and distribution costs as selling,general and administrative expense.

The contribution to these results by each segment isdiscussed below.

*CommercialProducts*

Sales of the Commercial Products Group increased$24,245,000 or 24.5% compared to the 2004 year. This gain reflected increased commercial construction activity togetherwith increased sales prices, expanded geographic market penetration and newproduct introductions.  Gross profitincreased to 24.3% of sales in fiscal 2005 compared to 21.5% in 2004.  Despite experiencing higher aluminum costs,this Group achieved decreased material, labor and overhead cost percentagesmainly due to improved margins generated as a result of the substantiallyhigher sales volume coupled with increased prices.  Selling, general and administrative expensesincreased $1,433,000, although as a percentage of sales decreased to 11.8% ofsales compared to 13.1% of sales in 2004. These increased expenses reflectadditional employment and sales representation costs of $1,532,000 for the 2005year related to the increase in sales and achievement of incentive compensationtargets.  Partially offsetting theincrease was $180,000 of income related to retrospective adjustments to workers’compensation insurance policies.

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*ResidentialProducts*

Sales of the Residential Products Group increased$9,184,000 or 14.1% compared to the 2004 year. Consumer demand continued to stimulate new home construction, re-salesof existing homes and home improvement spending in the areas served by thisGroup.  New product introductions andmore aggressive promotional programs also contributed to the increase.  Gross profit increased to 31.3% of sales infiscal 2005 compared to 29.9% in 2004. Although the material cost percentage was unchanged from the prior year,this Group experienced decreased labor and overhead cost percentages comparedto 2004 reflecting production efficiencies attained from the substantiallyhigher sales volume coupled with a decrease of $368,000 for fiscal 2005 workers’compensation claims.  Selling, generaland administrative expenses increased $981,000, but decreased as a percentageof sales to 12.7% of sales in fiscal 2005 compared to 13.0% of sales in2004.  This increase was mainlyattributable to increases of $317,000 for advertising and promotional costs,$299,000 for fiscal 2005 general liability insurance costs, and $178,000 foradditional employment related to the increase in sales.

*Aluminum Extrusion*

Sales of the Aluminum Extrusion Group increased$5,125,000 or 10.4% compared to the 2004 year. Although net tonnage shipped to outside customers decreased 2.5%,particularly in the area served by our California facility, the Group benefitedfrom an increase in selling prices.  Costof sales as a percentage of sales at 96.1% for fiscal 2005, was only slightlybetter than the 96.2% recorded in fiscal 2004. Due to the highly competitive marketplace, selling prices were increaseddirectly in line with the increased cost of aluminum resulting in increasedmaterial cost percentages and decreased labor and overhead cost percentages forthe 2005 year.  Additionally, labor andoverhead production efficiencies gained from higher total tonnage output,including shipments to intercompany customers, decreased labor and overheadcost percentages for the 2005 year. These gains served to offset increasedmaterial cost percentages.  Selling,general and administrative expenses increased $584,000, although as apercentage of sales remained unchanged at 3.1% of sales compared to the 2004year.  This increase reflects increasedcosts of $560,000 for retrospective adjustments to workers’ compensationinsurance policies.

*Corporate*

General and administrative expenses increased$765,000, but decreased as a percentage of consolidated net sales to 3.9% ofnet sales in fiscal 2005 compared to 4.2% in 2004.  The increase is mainly attributable to$780,000 for costs related to complying with the internal control requirementsof the Sarbanes-Oxley legislation. Additional costs of $199,000 were incurred during the 2005 year relatingto higher employment and recruitment expense and $104,000 for increased costsfor retrospective adjustments to workers’ compensation and general liabilityinsurance policies.  Partially offsettingthese increases was a recovery of $265,000 for 2005 and prior year legal feesthat was recorded as a result of a settlement.

The increase in interest income related to increasedfunds available for investment during the 2005 year combined with higher ratesof return compared to 2004.

The effective tax rate increased to 38.0% in fiscal2005 compared to 37.7% in 2004.

**Liquidity and Capital Resources**

Cash and cash equivalents at June 30, 2006 were$20,446,000 compared to $12,437,000 at June 30, 2005 and $15,964,000 at June30, 2004.  Working capital at June 30,2006 was $88,384,000 compared to $77,554,000 at June 30, 2005 and$67,860,000 at June 30, 2004.  Theratio of current assets to current liabilities was 3.6 at the end of 2006compared to 4.1 at the end of 2005 and 3.8 at the end of 2004.  The Company continues to be in excellentposition to meet its short-term operating and discretionary cashrequirements.  Funds in excess of currentoperating requirements are invested in short-term interest-bearing instruments.

Net cash provided by operating activities wasapproximately $18.2 million, $5.2 million and $12.1 million in fiscal 2006,2005 and 2004, respectively.  Cash usedin investing activities was utilized for capital expenditures for property,plant and equipment of approximately $6,358,000 in 2006, $4,246,000 in 2005 and$3,482,000 in 2004 which were financed through internal cash flow and cashreserves.  The Company projects netcapital expenditures of approximately $6,400,000 for fiscal 2007 for expansionof production capacity, as well as normal recurring capitalized replacementitems.  The Company anticipates financingthese expenditures through internal cash flow and cash reserves.  Cash used in financing activities during thepast three years was utilized mainly for payment of shareholder dividends asauthorized by the Board of Directors.

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The Company had no long-term debt outstanding at theend of 2006, 2005, or 2004.  The Companyhad $22,690,000 in available credit at the end of 2006 under short-termborrowing arrangements (see Note 3).

The Company’s financial condition remainsstrong.  The Company believes that itscash, other liquid assets, operating cash flows and borrowing capacity, takentogether, provide more than adequate resources to fund ongoing operatingrequirements and future capital expenditures related to the expansion ofexisting businesses.

**Inflation, Trends, and GeneralConsiderations**

From 2004 to 2006, inflation has not had a materialeffect on our results of operations.  Ourperformance is dependent to a significant extent upon levels of newconstruction, repair and remodeling for residential and commercialconstruction, all of which are affected by such factors as prevailing interestrates, consumer confidence levels and general economic outlook.  In the near term, we expect to operate in anenvironment of increasing levels of commercial construction activity.  Increases in interest rates are expected tohave a negative impact on the level of residential housing constructionactivity as evidenced by recent declines in new housing starts; however weexpect residential remodeling activity to remain strong for the foreseeablefuture.  The demand for our products isseasonal, particularly in the colder regions of North America where inclementweather during the winter months usually reduces the level of building andremodeling activity.  Partially as aresult we usually experience lower sales levels during the second and thirdquarters of our fiscal year.

**Critical Accounting Policies**

The Summary of Accounting Policies within the Notesto the Consolidated Financial Statements includes the significant policies andprocedures used in the preparation of the Company’s consolidated financialstatements. The following is a discussion of each of the Company’s criticalaccounting policies:

## *Revenue Recognition*

Sales are recognized when products areshipped or when services are provided, assuming no significant Companyobligations remain and the collection of related receivables is probable.  Revenue recognition on product sales is notsubject to significant estimates, as the Company has not experiencedsignificant product returns.  The Company’snet sales exclude any tax assessed by a governmental authority that is directlyimposed on a revenue-producing transaction between a seller and a customer.  Standard shipping terms are FOB shippingpoint.

## *Valuation of Receivables*

The majority of the Company’s accounts receivablearises from sales of products under typical industry trade terms.  Trade accounts receivable are stated at cashdue from customers less allowances for doubtful accounts. Past due amounts aredetermined based on established terms and charged-off when deemeduncollectible.

The Company records an allowance for doubtfulaccounts for estimated losses resulting from the inability of its customers tomake required payments.  The allowance isbased on management’s assessment of the business environment, customers’financial condition, accounts receivable aging and historical collectionexpense.  Changes in any of these itemsmay impact the level of future write-offs. The Company did not have sales exceeding 5% to any single customer in2006, 2005 or 2004.

### *Valuationof Inventory*

The Company periodically reviews inventoryitems and overall stocking levels to ensure that adequate reserves exist forinventory deemed obsolete or excessive. In making this determination, the Company considers historical stockinglevels, recent sales of similar items and anticipated demand for these items.Changes in factors such as customer demand, new product offerings and othermatters could affect the level of inventory obsolescence in the future.

### *DeferredIncome Taxe**s***

Deferred income taxes are determined basedon the difference between the financial statement and tax bases of assets andliabilities using enacted tax laws and rates (see Note 9).

**Current and Pending AccountingChanges**

The American Jobs Creation Act of 2004(the “AJCA”) was signed into law on October 22, 2004.  The AJCA contains numerous changes to U.S.tax law, both temporary and permanent in nature, including a potential taxdeduction with respect to certain qualified domestic manufacturing activities,changes in the carryback and carryforward utilization periods for foreign

8

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tax credits and a dividend receiveddeduction with respect to accumulated income earned abroad.  The law has an impact on our effective taxrate, future taxable income and cash and tax planning strategies, among othereffects.  The initial benefit we derivedfrom the manufacturer’s tax deduction was recorded in the second quarter offiscal 2006.  See Note 11 for additionalinformation.

In November 2004, the Financial Accounting Standards Board (FASB) issuedSFAS No. 151, “Inventory Costs” (SFAS 151), which clarifies the accounting forabnormal amounts of idle facility expense, freight, handling costs, and wastedmaterial.  SFAS 151 was effective forinventory costs incurred beginning July 1, 2005.  Adoption of SFAS 151 has not had a materialimpact on our financial statements.

In December 2004, the FASB issued SFAS No.123R (revised 2004), “Share-Based Payment”, which replaced SFAS No. 123 andsuperseded APB Opinion No. 25. SFAS No. 123R requires all share-based paymentsto employees, including grants of employee stock options, to be recognized inthe financial statements based on their fair values in the first interim orannual period beginning after June 15, 2005. The pro forma disclosures previously permitted under SFAS No. 123 willno longer be an alternative to financial statement recognition.  As disclosed in Note 1 under Stock BasedCompensation, adoption of SFAS 123R has not had an impact on our financialstatements.

In March 2005, the FASB issued FinancialInterpretation No. 47 (FIN 47), “Accounting for Conditional Asset RetirementObligations”.  FIN 47 is aninterpretation of FASB Statement No. 143, “Accounting for Asset RetirementObligations” and clarifies (i) that an entity is required to recognize aliability for the fair value of a conditional asset retirement obligation whenincurred if the liability’s fair value can be reasonably estimated and (ii)when an entity would have sufficient information to reasonably estimate thefair value of an asset retirement obligation. The Company adopted FIN 47 effective June 30, 2006.  Adoption of FIN 47 has not had an impact onour financial statements.

In May 2005, the FASB issued SFAS No. 154(SFAS 154), “Accounting Changes and Error Corrections — a replacement of APBOpinion No. 20 and FASB Statement No. 3”. Under the previous guidance, most voluntary changes in accountingprinciple were required to be recognized as the cumulative effect of a changein accounting principle within the net income of the periods in which thechange is made.  SFAS 154 requires retrospectiveapplication to prior period financial statements of a voluntary change inaccounting principle, unless it is impracticable to do so.  SFAS 154 is effective for accounting changesand corrections of errors made in fiscal years beginning after December 15,2005.

In June 2006, the FASB issued FinancialInterpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes, anInterpretation of FASB Statement No. 109”, which clarifies the accounting foruncertainty in income taxes recognized in an enterprise’s financial statementsin accordance with FASB Statement No. 109, “Accounting for Income Taxes.”  This Interpretation prescribes a recognitionthreshold and measurement attribute for the financial statement recognition andmeasurement of a tax position taken or expected to be taken on a taxreturn.  This Interpretation alsoprovides guidance on de-recognition, classification, interest, penalties,accounting in interim periods, disclosure and transition.  The evaluation of a tax position in accordancewith this Interpretation will be a two-step process.  The first step will determine if it is morelikely than not that a tax position will be sustained upon examination andshould therefore be recognized.  Thesecond step will measure a tax position that meets the more likely than notrecognition threshold to determine the amount of benefit to recognize in thefinancial statements.  ThisInterpretation is effective for fiscal years beginning after December 15,2006.  Upon adoption in fiscal 2008 we donot anticipate that FIN 48 will have a material impact on our financialstatements.

**Forward-Looking Information**

This annual report contains forward-looking statements with respect tothe financial condition, results of operations and business of the Company.  Such items are subject to certain risks anduncertainties that could cause actual results to differ materially from thoseset forth in such statements, including the risks and uncertainties set forthin our Annual Report on Form 10-K filed with the Securities and ExchangeCommission. Readers are cautioned not to place undue reliance on theseforward-looking statements, which speak only as of the date the statement wasmade.  The Company undertakes no obligationto publicly update or revise any forward-looking statements, whether as aresult of new information, future events or otherwise.

**Off-Balance Sheet Transactions, Arrangements and OtherRelationships**

The Company is not a party to any off-balance sheet transactions,arrangements or other relationships.

9

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**QUARTERLY FINANCIAL DATA (UNAUDITED)**

For the years ended June 30, 2006 and 2005
| ** **                                    | ** ** | **First**   | ** ** | **Second**  | ** ** | **Third**   | ** ** | **Fourth**  | ** ** |
|-----------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|
| ** **                                    | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** |
| **2006**                                      |       |        |       |        |       |        |       |        |       |
| Net sales                                     |       | $           | 68,257,000 |        | $          | 65,730,000  |       | $           | 69,732,000 |   | $ | 77,107,000 |   |
| Gross profit                                  |       | 15,315,000  |       | 14,673,000  |       | 15,529,000  |       | 19,782,000  |       |
| Net income                                    |       | 3,587,000   |       | 3,578,000   |       | 3,468,000   |       | 5,611,000   |       |
| Earnings per  share - Basic and Diluted:      |       |        |       |        |       |        |       |        |       |
| Net income                                    |       | .84         |       | .83         |       | .81         |       | 1.30        |       |
| Dividends  declared                           |       | .30         |       | .30         |       | .30         |       | .30         |       |
| Stock price —  High                      |       | 39.40       |       | 41.30       |       | 42.80       |       | 44.99       |       |
| Stock price —  Low                       |       | 30.25       |       | 36.80       |       | 37.90       |       | 37.91       |       |
|                                          |       |        |       |        |       |        |       |        |       |
| **2005**                                      |       |        |       |        |       |        |       |        |       |
| Net sales                                     |       | $           | 60,727,000 |        | $          | 61,759,000  |       | $           | 62,088,000 |   | $ | 67,014,000 |   |
| Gross profit                                  |       | 13,964,000  |       | 13,702,000  |       | 13,894,000  |       | 16,551,000  |       |
| Net income                                    |       | 3,034,000   |       | 2,791,000   |       | 2,731,000   |       | 4,386,000   |       |
| Earnings per  share — Basic and Diluted: |       |        |       |        |       |        |       |        |       |
| Net income                                    |       | .71         |       | .66         |       | .64         |       | 1.03        |       |
| Dividends  declared                           |       | .30         |       | .30         |       | .30         |       | .30         |       |
| Stock price —  High                      |       | 30.33       |       | 34.40       |       | 35.74       |       | 35.49       |       |
| Stock price — Low                        |       | 25.70       |       | 28.25       |       | 31.10       |       | 30.40       |       |

 

10

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**CERTIFICATIONS**

International Aluminum Corporation (a) has filed the CEO and CFOcertifications required by Section 302 of the Sarbanes-Oxley Act of 2002 asExhibits to its Annual Report on Form 10-K for the year ended June 30, 2006 and(b) will submit to the New York Stock Exchange (NYSE) the 2006 Annual CEOCertification regarding compliance with the NYSE corporate governance listingstandards.

**MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIALREPORTING**

International Aluminum Corporation’s management is responsible forestablishing and maintaining adequate internal control over financialreporting.  The Company’s internalcontrol over financial reporting is a process designed to provide reasonableassurance regarding the reliability of financial reporting and the preparationof the consolidated financial statements and related disclosures in accordancewith generally accepted accounting principles. The Company’s internal control over financial reporting includes thosepolicies and procedures that (1) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions of theCompany; (2) provide reasonable assurance that transactions are recorded asnecessary to permit preparation of the consolidated financial statements andrelated disclosures in accordance with generally accepted accountingprinciples; (3) provide reasonable assurance that receipts and expenditures ofthe Company are being made only in accordance with authorizations of managementand directors of the Company; and (4) provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use, or dispositionof the Company’s assets that could have a material effect on the consolidatedfinancial statements and related disclosures.

Because of inherent limitations, internal control over financialreporting may not prevent or detect misstatements. Also, projections of anyevaluation of effectiveness to future periods are subject to the risk thatcontrols may become inadequate because of changes in conditions, or that thedegree of compliance with the policies and procedures may deteriorate.

The Company assessed the effectiveness of its internal control overfinancial reporting as of June 30, 2006. In making this assessment, management used the criteria set forth by theCommittee of Sponsoring Organizations of the Treadway Commission (“COSO”) in *INTERNAL CONTROL-INTEGRATED FRAMEWORK*.

Based upon management’s assessment using the criteria contained in COSO,the Company’s management has concluded that, as of June 30, 2006, InternationalAluminum Corporation’s internal control over financial reporting was effective.

Management’s assessment of the effectiveness of the Company’s internalcontrol over financial reporting as of June 30, 2006 has been audited byPricewaterhouseCoopers LLP, an independent registered public accounting firm,as stated in their report which is included herein.

11

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

Tothe Board of Directors and Shareholders ofInternational Aluminum Corporation:

We have completed integrated audits of International AluminumCorporation’s 2006 and 2005 consolidated financial statements and of itsinternal control over financial reporting as of June 30, 2006 and an audit of its2004 consolidated financial statements in accordance with the standards of thePublic Company Accounting Oversight Board (United States).  Our opinions, based on our audits, arepresented below.

**Consolidated financial statements**

In our opinion, the accompanying consolidated balance sheets and therelated consolidated statements of income, shareholders’ equity and cash flowspresent fairly, in all material respects, the financial position ofInternational Aluminum Corporation and its subsidiaries at June 30, 2006 and2005, and the results of their operations and their cash flows for each of thethree years in the period ended June 30, 2006 in conformity with accountingprinciples generally accepted in the United States of America.  These financial statements are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements based on our audits.  Weconducted our audits of these statements in accordance with the standards ofthe Public Company Accounting Oversight Board (United States).  Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit of financial statementsincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements, assessing the accounting principlesused and significant estimates made by management, and evaluating the overallfinancial statement presentation.  Webelieve that our audits provide a reasonable basis for our opinion.

**Internal control over financial reporting**

Also, in our opinion, management’s assessment, included in theaccompanying Management’s Report On Internal Control Over Financial Reporting,that the Company maintained effective internal control over financial reportingas of June 30, 2006 based on criteria established in *InternalControl — Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO), is fairly stated, in allmaterial respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all materialrespects, effective internal control over financial reporting as of June 30,2006, based on criteria established in *Internal Control —Integrated Framework* issued by the COSO.  The Company’s management is responsible formaintaining effective internal control over financial reporting and for itsassessment of the effectiveness of internal control over financialreporting.  Our responsibility is toexpress opinions on management’s assessment and on the effectiveness of theCompany’s internal control over financial reporting based on our audit.  We conducted our audit of internal controlover financial reporting in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtainreasonable assurance about whether effective internal control over financialreporting was maintained in all material respects.  An audit of internal control over financialreporting includes obtaining an understanding of internal control overfinancial reporting, evaluating management’s assessment, testing and evaluatingthe design and operating effectiveness of internal control, and performing suchother procedures as we consider necessary in the circumstances.  We believe that our audit provides areasonable basis for our opinions.

12

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A company’s internal control over financial reporting is a processdesigned to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles.  A company’s internal control over financialreporting includes those policies and procedures that (i) pertain to themaintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company;(ii) provide reasonable assurance that transactions are recorded asnecessary to permit preparation of financial statements in accordance withgenerally accepted accounting principles, and that receipts and expenditures ofthe company are being made only in accordance with authorizations of managementand directors of the company; and (iii) provide reasonable assuranceregarding prevention or timely detection of unauthorized acquisition, use, ordisposition of the company’s assets that could have a material effect on thefinancial statements.

Because of its inherent limitations, internal control over financialreporting may not prevent or detect misstatements.  Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.
|                             |   |
|-----------------------------|--------|
|                        |
| PricewaterhouseCoopers  LLP |
| Los Angeles,  California    |
| September 8,  2006          |

 

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# **INTERNATIONAL ALUMINUM CORPORATION****CONSOLIDATEDSTATEMENTS OF INCOME**

For the years ended June 30, 2006, 2005 and 2004
| ** **                                             | ** ** | **2006**    | ** **  | **2005**    | ** ** | **2004**    | ** ** |
|--------------------------------------------------------|------------|-------------|-------------|-------------|------------|-------------|------------|
| Net sales                                              |       | $           | 280,826,000 |        | $          | 251,588,000 |       | $ | 213,034,000 |   |
| Cost of sales                                          |       | 215,527,000 |        | 193,477,000 |       | 169,036,000 |       |
| Gross profit                                           |       | 65,299,000  |        | 58,111,000  |       | 43,998,000  |       |
| Selling, general  and administrative expenses          |       | 40,094,000  |        | 37,318,000  |       | 33,555,000  |       |
| Income from operations                                 |       | 25,205,000  |        | 20,793,000  |       | 10,443,000  |       |
| Interest income                                        |       | 339,000     |        | 85,000      |       | 50,000      |       |
| Interest expense                                       |       | —      |        | (6,000      | )          | (20,000     | )          |
| Income from continuing operations before income  taxes |       | 25,544,000  |        | 20,872,000  |       | 10,473,000  |       |
| Provision for  income taxes                            |       | 9,300,000   |        | 7,930,000   |       | 3,944,000   |       |
| Income from continuing operations                      |       | 16,244,000  |        | 12,942,000  |       | 6,529,000   |       |
| Income from  discontinued operations, net of tax       |       | —      |        | —      |       | 129,000     |       |
| Net income                                             |       | $           | 16,244,000  |        | $          | 12,942,000  |       | $ | 6,658,000 |   |
|                                                   |       |        |        |        |       |        |       |
| Earnings per  share — Basic and Diluted:          |       |        |        |        |       |        |       |
| Continuing operations                                  |       | $           | 3.78        |        | $          | 3.04        |       | $ | 1.54 |   |
| Discontinued operations                                |       | —      |        | —      |       | .03         |       |
| Total                                                  |       | $           | 3.78        |        | $          | 3.04        |       | $ | 1.57 |   |

 

See accompanying notes to consolidated financial statements.

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# **INTERNATIONAL ALUMINUM CORPORATION**

**CONSOLIDATED BALANCE SHEETS**

June 30, 2006 and 2005
| ** **                                                                      | ** ** | **2006**    | ** **  | **2005**    | ** ** |
|---------------------------------------------------------------------------------|------------|-------------|-------------|-------------|------------|
| **Assets**                                                                      |       |        |        |        |       |
| ** **                                                                      |       |        |        |        |       |
| Current assets:                                                                 |       |        |        |        |       |
| Cash and cash equivalents                                                       |       | $           | 20,446,000  |        | $          | 12,437,000 |   |
| Accounts receivable, less allowance of $903,000 in  2006 and $1,244,000 in 2005 |       | 49,825,000  |        | 43,543,000  |       |
| Inventories                                                                     |       | 46,917,000  |        | 41,270,000  |       |
| Prepaid expenses and deposits                                                   |       | 1,856,000   |        | 2,055,000   |       |
| Deferred income taxes                                                           |       | 3,104,000   |        | 3,310,000   |       |
| Total current assets                                                            |       | 122,148,000 |        | 102,615,000 |       |
|                                                                            |       |        |        |        |       |
| Property, plant  and equipment, at cost                                         |       | 129,639,000 |        | 125,081,000 |       |
| Accumulated  depreciation                                                       |       | (81,846,000 | )           | (78,179,000 | )          |
| Net property, plant and equipment                                               |       | 47,793,000  |        | 46,902,000  |       |
|                                                                            |       |        |        |        |       |
| Other assets:                                                                   |       |        |        |        |       |
| Goodwill                                                                        |       | 689,000     |        | 645,000     |       |
| Other                                                                           |       | 2,318,000   |        | 1,469,000   |       |
| Total other assets                                                              |       | 3,007,000   |        | 2,114,000   |       |
| Total Assets                                                                    |       | $           | 172,948,000 |        | $          | 151,631,000 |   |
|                                                                            |       |        |        |        |       |
| **Liabilities  and Shareholders’ Equity**                                  |       |        |        |        |       |
| ** **                                                                      |       |        |        |        |       |
| Current  liabilities:                                                           |       |        |        |        |       |
| Accounts payable                                                                |       | $           | 16,619,000  |        | $          | 9,958,000 |   |
| Accrued liabilities                                                             |       | 15,282,000  |        | 13,531,000  |       |
| Income taxes payable                                                            |       | 1,863,000   |        | 1,572,000   |       |
| Total current liabilities                                                       |       | 33,764,000  |        | 25,061,000  |       |
|                                                                            |       |        |        |        |       |
| Deferred income  taxes                                                          |       | 5,527,000   |        | 6,067,000   |       |
| Total liabilities                                                               |       | 39,291,000  |        | 31,128,000  |       |
|                                                                            |       |        |        |        |       |
| Commitments and  contingencies (Note 4)                                         |       |        |        |        |       |
|                                                                            |       |        |        |        |       |
| Shareholders’  equity:                                                     |       |        |        |        |       |
| Common stock                                                                    |       | 4,826,000   |        | 4,791,000   |       |
| Paid-in capital                                                                 |       | 5,639,000   |        | 4,689,000   |       |
| Retained earnings                                                               |       | 120,060,000 |        | 108,975,000 |       |
| Accumulated other comprehensive income                                          |       | 3,132,000   |        | 2,048,000   |       |
| Total shareholders’ equity                                                 |       | 133,657,000 |        | 120,503,000 |       |
| Total Liabilities and  Shareholders’ Equity                                |       | $           | 172,948,000 |        | $          | 151,631,000 |   |

 

See accompanying notes to consolidated financial statements.

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# **INTERNATIONAL ALUMINUM CORPORATION**

# **CONSOLIDATED STATEMENTS OF CASH FLOWS**

For the years ended June 30, 2006, 2005 and 2004
| ** **                                      | ** ** | **2006**   | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|-------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| Cash flows from  operating activities:          |       |       |       |       |       |       |       |
| Net income                                      |       | $          | 16,244,000 |       | $          | 12,942,000 |       | $ | 6,658,000 |   |
| Adjustments for noncash transactions:           |       |       |       |       |       |       |       |
| Depreciation and amortization                   |       | 5,873,000  |       | 6,269,000  |       | 6,526,000  |       |
| Deferred income taxes                           |       | (334,000   | )          | (1,101,000 | )          | (260,000   | )          |
| Changes in assets and liabilities:              |       |       |       |       |       |       |       |
| Receivables                                     |       | (5,927,000 | )          | (4,232,000 | )          | (4,667,000 | )          |
| Inventories                                     |       | (5,439,000 | )          | (8,811,000 | )          | (3,714,000 | )          |
| Prepaid expenses and other                      |       | (636,000   | )          | (886,000   | )          | 490,000    |       |
| Accounts payable                                |       | 6,328,000  |       | (1,148,000 | )          | 3,434,000  |       |
| Accrued liabilities                             |       | 1,729,000  |       | 1,609,000  |       | 2,883,000  |       |
| Income taxes payable                            |       | 399,000    |       | 557,000    |       | 796,000    |       |
| Net cash provided by operating activities       |       | 18,237,000 |       | 5,199,000  |       | 12,146,000 |       |
|                                            |       |       |       |       |       |       |       |
| Cash flows from  investing activities:          |       |       |       |       |       |       |       |
| Capital expenditures                            |       | (6,358,000 | )          | (4,246,000 | )          | (3,482,000 | )          |
| Proceeds from sales of capital assets           |       | 209,000    |       | 221,000    |       | 212,000    |       |
| Net cash used in investing activities           |       | (6,149,000 | )          | (4,025,000 | )          | (3,270,000 | )          |
|                                            |       |       |       |       |       |       |       |
| Cash flows from  financing activities:          |       |       |       |       |       |       |       |
| Dividends paid to shareholders                  |       | (5,159,000 | )          | (5,107,000 | )          | (5,094,000 | )          |
| Exercise of stock options                       |       | 985,000    |       | 592,000    |       | —     |       |
| Net repayments under lines of credit            |       | —     |       | (220,000   | )          | (394,000   | )          |
| Net cash used in financing activities           |       | (4,174,000 | )          | (4,735,000 | )          | (5,488,000 | )          |
|                                            |       |       |       |       |       |       |       |
| Effect of  exchange rate changes                |       | 95,000     |       | 34,000     |       | 6,000      |       |
|                                            |       |       |       |       |       |       |       |
| Net change in  cash and cash equivalents        |       | 8,009,000  |       | (3,527,000 | )          | 3,394,000  |       |
| Cash and cash  equivalents at beginning of year |       | 12,437,000 |       | 15,964,000 |       | 12,570,000 |       |
| Cash and cash  equivalents at end of year       |       | $          | 20,446,000 |       | $          | 12,437,000 |       | $ | 15,964,000 |   |
|                                            |       |       |       |       |       |       |       |
| Supplemental  cash flow information:            |       |       |       |       |       |       |       |
| Interest payments                               |       | $          | —     |       | $          | 6,000      |       | $ | 20,000 |   |
| Income tax  payments                            |       | $          | 9,112,000  |       | $          | 8,088,000  |       | $ | 3,184,000 |   |

 

See accompanying notes to consolidated financial statements.

16

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# **INTERNATIONAL ALUMINUM CORPORATION**

# **CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY**

For the years ended June 30, 2006, 2005 and 2004
| ** **                 | ** ** | ** **            | ** ** | ** **  | ** ** | ** **   | ** ** | ** **        | ** ** | **Accumulated** | ** **  | ** **  | ** ** |
|----------------------------|------------|-----------------------|------------|-------------|------------|--------------|------------|-------------------|------------|-----------------|-------------|-------------|------------|
| ** **                 | ** ** | ** **            | ** ** | ** **  | ** ** | ** **   | ** ** | ** **        | ** ** | **Other**       | ** **  | ** **  | ** ** |
| ** **                 | ** ** | **Common Stock** | ** ** | **Paid-in** | ** ** | **Retained** | ** ** | **Comprehensive** | ** ** | ** **      | ** **  |
| ** **                 | ** ** | **Shares**            | ** ** | **Amount**  | ** ** | **Capital**  | ** ** | **Earnings**      | ** ** | **Income**      | ** **  | **Total**   | ** ** |
| Balance, June  30, 2003    |       | 4,244,794             |       | $           | 4,765,000  |         | $          | 4,123,000         |       | $               | 99,576,000  |        | $          | 1,072,000 |   | $ | 109,536,000 |   |
| Net income                 |       |                  |       |        |       |         |       | 6,658,000         |       |            |        | 6,658,000   |       |
| Translation adjustment     |       |                  |       |        |       |         |       |              |       | 106,000         |        | 106,000     |       |
| Total comprehensive income |       |                  |       |        |       |         |       |              |       |            |        | 6,764,000   |       |
| Cash dividends             |       |                  |       |        |       |         |       | (5,094,000        | )          |            |        | (5,094,000  | )          |
| Balance, June  30, 2004    |       | 4,244,794             |       | 4,765,000   |       | 4,123,000    |       | 101,140,000       |       | 1,178,000       |        | 111,206,000 |       |
|                       |       |                  |       |        |       |         |       |              |       |            |        |        |       |
| Net income                 |       |                  |       |        |       |         |       | 12,942,000        |       |            |        | 12,942,000  |       |
| Translation adjustment     |       |                  |       |        |       |         |       |              |       | 870,000         |        | 870,000     |       |
| Total comprehensive income |       |                  |       |        |       |         |       |              |       |            |        | 13,812,000  |       |
| Exercise of stock options  |       | 25,938                |       | 26,000      |       | 566,000      |       |              |       |            |        | 592,000     |       |
| Cash dividends             |       |                  |       |        |       |         |       | (5,107,000        | )          |            |        | (5,107,000  | )          |
| Balance, June  30, 2005    |       | 4,270,732             |       | 4,791,000   |       | 4,689,000    |       | 108,975,000       |       | 2,048,000       |        | 120,503,000 |       |
|                       |       |                  |       |        |       |         |       |              |       |            |        |        |       |
| Net income                 |       |                  |       |        |       |         |       | 16,244,000        |       |            |        | 16,244,000  |       |
| Translation adjustment     |       |                  |       |        |       |         |       |              |       | 1,084,000       |        | 1,084,000   |       |
| Total comprehensive income |       |                  |       |        |       |         |       |              |       |            |        | 17,328,000  |       |
| Exercise of stock options  |       | 34,606                |       | 35,000      |       | 950,000      |       |              |       |            |        | 985,000     |       |
| Cash dividends             |       |                  |       |        |       |         |       | (5,159,000        | )          |            |        | (5,159,000  | )          |
| Balance, June 30, 2006     |       | 4,305,338             |       | $           | 4,826,000  |         | $          | 5,639,000         |       | $               | 120,060,000 |        | $          | 3,132,000 |   | $ | 133,657,000 |   |

 

See accompanying notes to consolidated financial statements.

17

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# **NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**Note 1. Significant Accounting Policies and Procedures**

**Description of Business and Principles of Consolidation**

International AluminumCorporation (the Company) is an integrated building products manufacturer ofdiversified lines of quality aluminum and vinyl products.  The consolidated financial statements includethe accounts of the Company and its domestic and foreign subsidiaries.  All significant intercompany transactions andaccounts have been eliminated in consolidation. Certain reclassifications of prior year information may have been madeto conform to the current presentation.

**Revenue Recognition**

Sales are recognized when products are shipped or services are provided,assuming no significant Company obligations remain and the collection ofrelated receivables is probable.  Netsales exclude any tax assessed by a governmental authority that is directlyimposed on a revenue-producing transaction between a seller and a customer.Shipping charges billed to customers are included in Net Sales and shipping andhandling charges incurred by the Company are included in Cost of Sales.  Standard shipping terms are FOB shippingpoint.

**Estimates and Assumptions**

The preparation of the consolidated financial statements in conformitywith accounting principles generally accepted in the United States of Americarequires management to make estimates and assumptions that affect the amountsreported in the financial statements and accompanying notes.  Actual results could differ from thoseestimates.

**Cash and Cash Equivalents**

Cash and cash equivalents include cash on hand and marketable securitieswith original maturities of three months or less at the date of purchase.

**Concentrations of Credit Risk**

The majority of the Company’s accounts receivable arises from sales ofproducts under typical industry trade terms. Trade accounts receivable arestated at cash due from customers less allowances for doubtful accounts.  Past due amounts are determined based onestablished terms and charged-off when deemed uncollectible.

The Company records an allowance for doubtful accounts for estimatedlosses resulting from the inability of its customers to make requiredpayments.  The allowance is based onmanagement’s assessment of the business environment, customers’ financialcondition, accounts receivable aging and historical collection expense.  Changes in any of these items may impact thelevel of future write-offs.  The Companydid not have sales exceeding 5% to any single customer in 2006, 2005 or 2004.

**Inventory**

Inventories are valued at the lower of cost or market.  The cost is determined by the first-in,first-out (FIFO) method and inventories are reviewed for excess quantities andobsolescence.  Inventories at fiscal yearends were as follows:
| ** **        | ** ** | **2006**  | ** ** | **2005**  | ** ** |
|-------------------|------------|-----------|------------|-----------|------------|
| Raw materials     |       | $         | 39,531,000 |      | $          | 34,720,000 |   |
| Work in process   |       | 898,000   |       | 1,333,000 |       |
| Finished goods    |       | 6,488,000 |       | 5,217,000 |       |
| Total inventories |       | $         | 46,917,000 |      | $          | 41,270,000 |   |

 

18

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**Foreign Currency Translation**

Assets and liabilities of the Company’s foreign subsidiaries aretranslated into U.S. dollars at year-end exchange rates and revenues andexpenses are translated at average rates prevailing during the year.  Local currency is considered to be thefunctional currency.  Translationadjustments are deferred into accumulated other comprehensive income, aseparate component of shareholders’ equity. Foreign currency transaction gains and losses are included in results ofoperations as incurred.

**Depreciation and Amortization**

Depreciation and amortization are provided over the estimated usefullives of the assets (up to 40 years for buildings, 5 to 20 years for machineryand plant equipment, 3 to 5 years for office equipment and computers and 2.5 to7 years for vehicles) or the remaining terms of the leases, whichever isshorter, using the straight-line method for financial reporting purposes andaccelerated methods for tax purposes.

**Goodwill**

The excess of the purchase price over the underlying book value of anybusinesses or assets acquired is classified as “Goodwill.”  The nominal increase in goodwill during 2006relates to the effect of applying fluctuating foreign exchange rates tobalances pertaining to our Canadian subsidiaries.  The Company accounts for its goodwill underStatement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and OtherIntangible Assets.”  Under SFAS No. 142,goodwill is not amortized, but it is tested for impairment at leastannually.  Each year the Company testsfor impairment of goodwill according to a two-step approach.  In the first step, the Company tests forimpairment of goodwill by estimating the fair values of its reporting unitsusing the present value of future cash flows approach, subject to a comparisonfor reasonableness to its market capitalization at the date of valuation.  If the carrying amount exceeds the fairvalue, the second step of the goodwill impairment test is performed to measurethe amount of the impairment loss, if any. In the second step the implied fair value of the goodwill is estimatedas the fair value of the reporting unit used in the first step less the fairvalue of all other net tangible and intangible assets of the reportingunit.  If the carrying amount of thegoodwill exceeds its implied fair market value, an impairment loss isrecognized in an amount equal to that excess, not to exceed the carrying amountof the goodwill.  In addition, goodwillof a reporting unit is tested for impairment between annual tests if an eventoccurs or circumstances change that would more likely than not reduce the fairvalue of a reporting unit below its carrying value.  No impairments have been recorded since theinitial adoption of SFAS 142.

**Income Taxes**

The Company accounts for income taxes under SFAS No. 109, “Accountingfor Income Taxes.”  SFAS No. 109 requiresan asset and liability approach for financial reporting for income taxes.  Under SFAS No. 109, deferred taxes areprovided for temporary differences between the carrying values of assets andliabilities for financial reporting and tax purposes at the enacted rates atwhich these differences are expected to reverse.

**Long-Lived Assets**

Whenever events indicate that the carrying values of long-lived assetsmay not be recoverable, the Company evaluates the carrying values of suchassets using future undiscounted cash flows to determine if an impairmentexists.  If an impairment is determinedto exist, any related impairment loss is calculated based upon comparison ofthe fair value to the carrying value of the assets.

19

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**Advertising Expense**

The Company expenses advertising costs as incurred.  Advertising expenses of approximately$2,345,000, $2,424,000 and $2,011,000 were charged to selling, general andadministrative expenses for the years ended June 30, 2006, 2005 and 2004,respectively.

**Stock Based Compensation**

The Company granted incentive stock options for the purchase of commonstock to certain executive and managerial employees under the Company’s 1991Stock Option Plan, whose expired granting authority has been transferred to thesuccessor plan, the 2001 Stock Option Plan. The options have an exercise price equal to the market price of thestock on the date of grant, a term of ten years and become exercisable, orvested, in equal installments over a five-year period from the date of grant solong as the employees remain in the continuous employ of the Company.  Prior to July 1, 2005, the Company appliedAccounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issuedto Employees”, and related Interpretations in accounting for stock optionsgranted under the plan.  Under APBNo. 25, compensation cost, if any, is recognized over the respectivevesting period based on the difference, if any, on the date of grant betweenthe fair value of the Company’s common stock and the exercise price.  All options issued have an exercise priceequal to the fair value on the date of grant. Accordingly, no compensation cost has been recognized for those stockoptions.  On December 31, 2002, theFASB issued SFAS No. 148, “Accounting for Stock-Based Compensation —Transition and Disclosure”, which amends SFAS No. 123, “Accounting forStock-Based Compensation”.  SFASNo. 148’s transition guidance and provisions for disclosures wereeffective for fiscal years ending after December 15, 2002.  The Company did not adopt fair valueaccounting for employee stock options under SFAS No. 123 and SFASNo. 148.  Since all outstandingstock awards are stock options with no intrinsic value at the date of grant andwere fully vested before the income statement periods presented, there wouldhave been no change in reported net income and earnings per share hadcompensation cost been determined based on the fair value at the grant dates asprescribed by SFAS 123.  In addition, onJuly 1, 2005 the Company adopted SFAS No. 123R (revised 2004), “Share-BasedPayment”, which replaced SFAS No. 123 and superseded APB Opinion No. 25, usingthe modified prospective application. SFAS No. 123R requires all share-based payments to employees, includinggrants of employee stock options, to be recognized in the financial statementsbased on their fair values in the first interim or annual period beginningafter June 15, 2005.  The pro formadisclosures previously permitted under SFAS No. 123 will no longer be analternative to financial statement recognition. The adoption of SFAS 123R did not result in compensation cost beingrecorded, as all outstanding options were fully vested on the date of adoption.  During the three-year period ended June 30,2006 no stock options or other stock awards were granted.

**Note 2.  BalanceSheet Components**
| ** **                                  | ** ** | **2006**   | ** **  | **2005**   | ** ** |
|---------------------------------------------|------------|------------|-------------|------------|------------|
| **Property,  Plant and Equipment, at Cost** |       |       |        |       |       |
| Land                                        |       | $          | 7,068,000   |       | $          | 6,953,000 |   |
| Buildings and  improvements                 |       | 32,988,000 |        | 29,932,000 |       |
| Machinery and  equipment                    |       | 77,608,000 |        | 74,016,000 |       |
| Office  Equipment/Computers                 |       | 7,356,000  |        | 7,427,000  |       |
| Vehicles                                    |       | 4,619,000  |        | 4,478,000  |       |
| Construction in  process                    |       | —     |        | 2,275,000  |       |
|                                        |       | $          | 129,639,000 |       | $          | 125,081,000 |   |

 
| ** **                                             | ** ** | **2006**  | ** ** | **2005**  | ** ** |
|--------------------------------------------------------|------------|-----------|------------|-----------|------------|
| **Accrued  Liabilities**                               |       |      |       |      |       |
| Wages, deferred  compensation and compensated absences |       | $         | 8,921,000  |      | $          | 8,167,000 |   |
| Taxes, other  than income taxes                        |       | 1,319,000 |       | 1,393,000 |       |
| Dividends                                              |       | 1,292,000 |       | 1,281,000 |       |
| Other                                                  |       | 3,750,000 |       | 2,690,000 |       |
|                                                   |       | $         | 15,282,000 |      | $          | 13,531,000 |   |

 

20

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**Note 3.  Short-TermDebt and Lines of Credit**

The Company has a loan agreement with a domestic bank providing for a$20,000,000 unsecured short-term line of credit at 55 basis points below theprevailing prime interest rate. There were no amounts outstanding under theagreement at June 30, 2006 or June 30, 2005.  Additionally, the Company’s Canadiansubsidiaries have loan agreements with a foreign bank providing for $2,690,000in collateralized short-term lines of credit, at the prevailing Canadian primeinterest rate.  There were no amountsoutstanding under the agreements at June 30, 2006 or June 30, 2005.

**Note 4. Commitments and Contingencies**

The Company is committed under real property lease agreements expiringat various dates to 2014.  Certain of theleases have renewal options for periods up to five years, and others providefor rent revisions at various dates. Under the leases, the Company is obligated to pay property taxes,insurance and maintenance.  All facilityleases are classified as operating leases.

Real property rental expense was $859,000in 2006, $806,000 in 2005, and $801,000 in 2004.  Real property rental commitments are$1,068,000 in 2007, $1,014,000 in 2008, $824,000 in 2009, $741,000 in 2010,$636,000 in 2011, and $727,000 in 2012-2014.

The Company wasnamed in a class action filed in California: Klotzer v. International WindowCorporation, et.al., filed in December 2002. The plaintiffs assert various causes of action, including strict productliability and breach of warranty.  Theplaintiffs also purport to represent a statewide class of persons who ownbuildings in California that contain the Company’s Series 6200 horizontalsliding, vertical hung, or fixed aluminum windows manufactured during theperiod 1993 to the present.  In November2005, the Court certified the plaintiff class. The named plaintiffs seek actualand punitive damages as well as injunctive and restitutionary relief on theirclaims, including the cost to remove and replace all of the Series 6200 windowsin the class.  The Company denies anyliability.

The Company’sinsurers have accepted the defense of this lawsuit under reservation ofrights.  The scope of the Company’sinsurance coverage may depend upon the ultimate disposition of the plaintiffs’claims. The Company believes the plaintiffs’ claims are without merit, and itintends to vigorously defend this lawsuit. The lawsuit is in the discovery phase, and the Company cannot predictits outcome or the extent to which insurance would be available to cover anyeventual judgment or settlement in the lawsuit.

The Company is party to various other claims, legal actions andcomplaints arising in the ordinary course of business which in the opinion ofmanagement are without merit or are of such kind, or involve such amounts, thatan unfavorable disposition would not have a material adverse effect on theconsolidated financial position, results of operations or cash flows of theCompany.

**Note 5.  StockOptions**

The options outstanding underthe 1991 and 2001 Stock Option Plans for fiscal year ended June 30, 2006 were:
| ** **                              | ** ** | **Outstanding**    | ** ** | **Exercisable**         | ** ** |
|-----------------------------------------|------------|--------------------|------------|-------------------------|------------|
| ** **                              | ** ** | **Number Of** | ** ** | **Weighted-Average**    | ** ** | **Number Of** | ** ** | **Weighted-Average** | ** ** |
| ** **                              | ** ** | **Shares**         | ** ** | **Exercise Price** | ** ** | **Shares** | ** ** | **Exercise Price** | ** ** |
| Outstanding,  June 30, 2005             |       | 55,526             |       | $                       | 28.89      |   | 55,526 |   | $ | 28.89 |   |
| Granted                                 |       | —             |       |                    |       |   |   |   |   |
| Exercised                               |       | 44,526             |       | 28.43                   |       | 11,000 |   | 30.75 |   |
| Expired                                 |       | (2,500             | )          | 28.00                   |       | — |   | — |   |
| Outstanding,  June 30, 2006             |       | 8,500              |       | 31.56                   |       | 8,500 |   | 31.56 |   |
|                                    |       |               |       |                    |       |   |   |   |   |
| Stock Option  Summary at June 30, 2006: |       |               |       |                    |       |   |   |   |   |
| $31.56 (Life:  1.6 years)               |       | 8,500              |       | 31.56                   |       | 8,500 |   | 31.56 |   |
| Available for future  grants            |       | 392,200            |       |                    |       |   |   |   |   |
|                                         |            |                    |            |                         |            |  |  |  |  |  |  |

Thetotal intrinsic value of options outstanding at June 30, 2006 was $54,740.  The total intrinsic value of optionsexercised during the fiscal year ended June 30, 2006 was $373,192.

Upon exercise, stock options are settledthrough issuance of previously authorized but unissued shares.

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**Note 6.  EarningsPer Share**

Basic earnings per share is computed by dividing net income by theweighted-average number of shares of common stock outstanding during therelated period.  Diluted earnings pershare is computed by dividing net income by the weighted-average common sharesand potentially dilutive common equivalent shares outstanding determined asfollows:
| ** **                                                      | ** ** | **2006**  | ** ** | **2005**  | ** ** | **2004**   | ** ** |
|-----------------------------------------------------------------|------------|-----------|------------|-----------|------------|------------|------------|
| Numerator:                                                      |       |      |       |      |       |       |       |
| Income from  continuing operations                              |       | $         | 16,244,000 |      | $          | 12,942,000 |       | $ | 6,529,000 |   |
| Income from  discontinued operations, net of tax                |       | —    |       | —    |       | 129,000    |       |
| Net income                                                      |       | $         | 16,244,000 |      | $          | 12,942,000 |       | $ | 6,658,000 |   |
|                                                            |       |      |       |      |       |       |       |
| Denominator:                                                    |       |      |       |      |       |       |       |
| Weighted-average  shares outstanding used to compute basic EPS  |       | 4,294,427 |       | 4,252,728 |       | 4,244,794  |       |
| Incremental shares  issuable upon the exercise of stock options |       | 2,561     |       | 6,928     |       | 3,401      |       |
| Shares used to  compute diluted EPS                             |       | 4,296,988 |       | 4,259,656 |       | 4,248,195  |       |
|                                                            |       |      |       |      |       |       |       |
| Basic and  Diluted net earnings per share:                      |       |      |       |      |       |       |       |
| Before effect of  discontinued operations                       |       | $         | 3.78       |      | $          | 3.04       |       | $ | 1.54 |   |
| Discontinued  operations                                        |       | —    |       | —    |       | .03        |       |
| Basic and Diluted net  earnings per share                       |       | $         | 3.78       |      | $          | 3.04       |       | $ | 1.57 |   |

Incremental shares issuableupon the assumed exercise of outstanding stock options are computed using theaverage market price of common stock during the related period.  The incremental shares for the fiscal yearsending 2005 and 2004 exclude 8,625 and 60,750 stock option shares,respectively, because their inclusion would be anti-dilutive, since the optionprice was greater than the Company’s average common stock price for relatedperiods.

**Note 7.  CapitalStock**

The Company has 500,000 shares of preferred stock authorized, with a $10par value, none of which is outstanding. There are 10,000,000 shares of common stock authorized, $1 par value, ofwhich 4,305,338 shares were outstanding at June 30, 2006 and 4,270,732 wereoutstanding at June 30, 2005.

**Note 8. Acquisitions and Divestitures**

During fiscal 2003, the Company ceasedoperations of its International Window-Colorado window and door subsidiarywhich was a component of the Residential Products segment. In accordance withSFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”,the Company wrote down the net assets of this subsidiary to their estimated netrealizable value and reported its results as discontinued operations.  Due to favorable accounts receivablecollections and the sale of a portion of the Window-Colorado equipment andinventory, the Company recognized a pre-tax gain of $215,000 ($129,000 net oftax) in fiscal 2004, which has been classified as discontinued operations.  The Company does not anticipate any futureactivity with respect to this subsidiary.

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# **Note 9. Income Taxes**

The components of income before U.S. andforeign income taxes are:
| ** ** | ** ** | **2006**  | ** ** | **2005** | ** ** | **2004**   | ** ** |
|------------|------------|-----------|------------|----------|------------|------------|------------|
| Domestic   |       | $         | 24,474,000 |     | $          | 20,535,000 |       | $ | 10,567,000 |   |
| Foreign    |       | 1,070,000 |       | 337,000  |       | 121,000    |       |
|       |       | $         | 25,544,000 |     | $          | 20,872,000 |       | $ | 10,688,000 |   |

 

The provision for income taxes is comprised of the following:
| ** **                            | ** ** | **2006**  | ** ** | **2005**   | ** ** | **2004**  | ** ** |
|---------------------------------------|------------|-----------|------------|------------|------------|-----------|------------|
| Current —                        |       |      |       |       |       |      |       |
| Federal                               |       | $         | 7,963,000  |       | $          | 7,776,000 |       | $ | 3,487,000 |   |
| State                                 |       | 1,535,000 |       | 984,000    |       | 568,000   |       |
| Foreign                               |       | 136,000   |       | 271,000    |       | 235,000   |       |
|                                  |       | 9,634,000 |       | 9,031,000  |       | 4,290,000 |       |
|                                  |       |      |       |       |       |      |       |
| Deferred —                       |       |      |       |       |       |      |       |
| Federal                               |       | (823,000  | )          | (876,000   | )          | (6,000    | )          |
| State                                 |       | (33,000   | )          | (75,000    | )          | (33,000   | )          |
| Foreign                               |       | 522,000   |       | (150,000   | )          | (221,000  | )          |
|                                  |       | (334,000  | )          | (1,101,000 | )          | (260,000  | )          |
|                                  |       | $         | 9,300,000  |       | $          | 7,930,000 |       | $ | 4,030,000 |   |
|                                  |       |      |       |       |       |      |       |
| Allocation of  total provision — |       |      |       |       |       |      |       |
| Continuing  operations                |       | $         | 9,300,000  |       | $          | 7,930,000 |       | $ | 3,944,000 |   |
| Discontinued  operations              |       | —    |       | —     |       | 86,000    |       |
| Total provision                       |       | $         | 9,300,000  |       | $          | 7,930,000 |       | $ | 4,030,000 |   |

 

A reconciliation between theprovisions for income taxes, computed by applying the Federal statutory rate toincome before taxes, and the book provisions for income taxes follows:
| ** **                                             | ** ** | **2006** | ** ** | **2005** | ** ** | **2004**  | ** ** |
|--------------------------------------------------------|------------|----------|------------|----------|------------|-----------|------------|
| Tax provision on  book income at statutory rate        |       | $        | 8,940,000  |     | $          | 7,305,000 |       | $ | 3,641,000 |   |
| Increases  (decreases) resulting from:                 |       |     |       |     |       |      |       |
| State income  taxes, net of Federal income tax benefit |       | 976,000  |       | 591,000  |       | 353,000   |       |
| AJCA Manufacturer’s  Deduction                    |       | (265,000 | )          | —   |       | —    |       |
| Reduction to  Federal tax reserve                      |       | (512,000 | )          | —   |       | —    |       |
| Other                                                  |       | 161,000  |       | 34,000   |       | 36,000    |       |
| Provision for income  taxes                            |       | $        | 9,300,000  |     | $          | 7,930,000 |       | $ | 4,030,000 |   |

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Deferred income taxes resultfrom temporary differences in the recognition of income and expenses for taxand financial statement purposes.  Thetax effects of the significant temporary differences that comprise the deferredtax assets and liabilities at year end are as follows:
| ** **                             | ** ** | **2006**  | ** ** | **2005**  | ** ** |
|----------------------------------------|------------|-----------|------------|-----------|------------|
| Accounts  receivable                   |       | $         | 309,000    |      | $          | 423,000 |   |
| Inventory                              |       | 470,000   |       | 387,000   |       |
| Accrued  liabilities                   |       | 1,789,000 |       | 1,478,000 |       |
| Canadian  operating loss carryforwards |       | 328,000   |       | 999,000   |       |
| Other                                  |       | 208,000   |       | 23,000    |       |
| Net deferred tax  asset                |       | $         | 3,104,000  |      | $          | 3,310,000 |   |
|                                   |       |      |       |      |       |
| Property, plant  and equipment         |       | $         | 5,450,000  |      | $          | 5,953,000 |   |
| Other                                  |       | 77,000    |       | 114,000   |       |
| Net deferred tax  liability            |       | $         | 5,527,000  |      | $          | 6,067,000 |   |

 

No provision for U.S. taxes has been made for undistributed earnings ofthe Canadian subsidiaries since it is expected that the major portion of suchearnings will continue to be reinvested for an indefinite period.  The Company has Canadian net operating losscarryforwards that expire between 2009 and 2011.  Management believes that it is more likelythan not that the Company will generate sufficient taxable income in theappropriate carryforward periods to realize the benefit of the Canadian netoperating loss carryforwards.

**Note 10.  SegmentInformation**

The Company’s operations are organized and managed by product type.  The Company currently operates in threesegments of the building products industry:

**COMMERCIAL**— Curtainwalls, window walls, slope glazed systems, storefront framing,entrance doors and frames, commercial operable windows, including products forstorm and blast-resistant applications; interior officefronts, officepartitions and interior doors and frames for the commercial building and tenantimprovement markets.

**RESIDENTIAL**— Extensive lines of windows and patio doors manufactured from vinyl andaluminum for the residential building and remodeling markets.

**ALUMINUM EXTRUSION** — Mill finish, anodized, painted andfabricated aluminum extrusions.

The Company uses a portion of its aluminum extrusion production in itsCommercial and Residential segments. Transfers are made at market prices. Accounting policies for the segments are the same as those described inNote 1.  The Company evaluatesperformance based on operating income or loss before any allocation ofcorporate overhead, interest or taxes.

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The following is significant financial information by operating segment,reconciling to the Company’s totals.
|                         | ** ** | **Sales** | ** ** | **Operating Income** | ** ** |
|-------------------------|------------|-----------|------------|---------------------------|------------|
| **(In thousands)** | ** ** | **2006**  | ** ** | **2005**                  | ** ** | **2004** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Commercial              |       | $         | 134,998    |                      | $          | 123,604 |   | $ | 99,807 |   | $ | 19,054 |   | $ | 15,518 |   | $ | 8,335 |   |
| Residential             |       | 85,668    |       | 74,443                    |       | 65,355 |   | 14,955 |   | 13,791 |   | 11,049 |   |
| Aluminum  Extrusion     |       | 130,829   |       | 114,807                   |       | 97,378 |   | 2,540 |   | 951 |   | 709 |   |
| Total segments          |       | 351,495   |       | 312,854                   |       | 262,540 |   | 36,549 |   | 30,260 |   | 20,093 |   |
| Eliminations            |       | (70,669   | )          | (61,266                   | )          | (49,506 | ) | (1,526 | ) | 273 |   | (668 | ) |
| Corporate               |       | —    |       | —                    |       | — |   | (9,818 | ) | (9,740 | ) | (8,982 | ) |
| Total                   |       | $         | 280,826    |                      | $          | 251,588 |   | $ | 213,034 |   | $ | 25,205 |   | $ | 20,793 |   | $ | 10,443 |   |

                                                                                                                                                                                                                              
|                         | ** ** | **Capital Expenditures** | ** ** | **Depreciation and Amortization** | ** ** |
|-------------------------|------------|-------------------------------|------------|---------------------------------------------|------------|
| **(In thousands)** | ** ** | **2006**                      | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Commercial              |       | $                             | 1,073      |                                        | $          | 688 |   | $ | 542 |   | $ | 1,597 |   | $ | 1,698 |   | $ | 1,820 |   |
| Residential             |       | 4,194                         |       | 3,110                                       |       | 2,075 |   | 1,869 |   | 1,798 |   | 1,847 |   |
| Aluminum  Extrusion     |       | 473                           |       | 367                                         |       | 519 |   | 2,167 |   | 2,410 |   | 2,481 |   |
| Total segments          |       | 5,740                         |       | 4,165                                       |       | 3,136 |   | 5,633 |   | 5,906 |   | 6,148 |   |
| Corporate               |       | 618                           |       | 81                                          |       | 346 |   | 240 |   | 363 |   | 378 |   |
| Total                   |       | $                             | 6,358      |                                        | $          | 4,246 |   | $ | 3,482 |   | $ | 5,873 |   | $ | 6,269 |   | $ | 6,526 |   |

 
|                         | ** ** | **Total Assets** | ** ** |
|-------------------------|------------|-----------------------|------------|
| **(In thousands)** | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Commercial              |       | $                     | 78,464     |   | $ | 66,353 |   |
| Residential             |       | 34,320                |       | 32,076 |   |
| Aluminum Extrusion      |       | 40,143                |       | 42,010 |   |
| Total segments          |       | 152,927               |       | 140,439 |   |
| Corporate               |       | 20,021                |       | 11,192 |   |
| Total                   |       | $                     | 172,948    |   | $ | 151,631 |   |

 

**Note 11.  Current and Pending Accounting Changes**

The American Jobs Creation Act of 2004(the “AJCA”) was signed into law on October 22, 2004.  The AJCA contains numerous changes to U.S.tax law, both temporary and permanent in nature, including a potential taxdeduction with respect to certain qualified domestic manufacturing activities,changes in the carryback and carryforward utilization periods for foreign taxcredits and a dividend received deduction with respect to accumulated incomeearned abroad. The law impacts the Company’s effective tax rate, future taxableincome and cash and tax planning strategies, amongst other effects. In December2004, the FASB issued Staff Position No. 109-1 (“FSP 109-1”), Application ofFASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction onQualified Production Activities Provided by the American Jobs Creation Act of2004 and Staff Position No. 109-2 (“FSP 109-2”), Accounting and DisclosureGuidance for the Foreign Earnings Repatriation Provision within the AmericanJobs Creation Act of 2004. FSP 109-1 clarifies that the manufacturer’s taxdeduction provided for under the AJCA should be accounted for as a specialdeduction in accordance with SFAS No. 109 and not as a tax rate reduction.  FSP 109-2 provides accounting and disclosureguidance for the repatriation of certain foreign earnings to a U.S. taxpayer asprovided for in the AJCA.  The Companyhas no plans to repatriate foreign earnings. The initial benefit we derived from the manufacturer’s tax deduction wasrecorded in the second quarter of fiscal 2006.

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In November 2004, the Financial Accounting Standards Board (FASB) issuedSFAS No. 151, “Inventory Costs” (SFAS 151), which clarifies the accounting forabnormal amounts of idle facility expense, freight, handling costs, and wastedmaterial.  SFAS 151 was effective forinventory costs incurred beginning July 1, 2005.  Adoption of SFAS 151 has not had a materialimpact on our financial statements.

In December 2004, the FASB issued SFAS No.123R (revised 2004), “Share-Based Payment,” which replaced SFAS No. 123 andsuperseded APB Opinion No. 25. SFAS No. 123R requires all share-based paymentsto employees, including grants of employee stock options, to be recognized inthe financial statements based on their fair values in the first interim orannual period beginning after June 15, 2005. The pro forma disclosures previously permitted under SFAS No. 123 willno longer be an alternative to financial statement recognition.  As previously disclosed in Note 1 under StockBased Compensation, adoption of SFAS 123R has not had an impact on ourfinancial statements.

In March 2005, the FASB issued FinancialInterpretation No. 47 (FIN 47), “Accounting for Conditional Asset RetirementObligations.”  FIN 47 is aninterpretation of FASB Statement No. 143, “Accounting for Asset RetirementObligations” and clarifies (i) that an entity is required to recognize aliability for the fair value of a conditional asset retirement obligation whenincurred if the liability’s fair value can be reasonably estimated and (ii)when an entity would have sufficient information to reasonably estimate thefair value of an asset retirement obligation. The Company adopted FIN 47 effective June 30, 2006.  Adoption of FIN 47 has not had an impact onour financial statements.

In May 2005, the FASB issued SFAS No. 154(SFAS 154), “Accounting Changes and Error Corrections — a replacement of APBOpinion No. 20 and FASB Statement No. 3.” Under the previous guidance, most voluntary changes in accountingprinciple were required to be recognized as the cumulative effect of a changein accounting principle within the net income of the periods in which thechange is made.  SFAS 154 requiresretrospective application to prior period financial statements of a voluntarychange in accounting principle, unless it is impracticable to do so.  SFAS 154 is effective for accounting changesand corrections of errors made in fiscal years beginning after December 15,2005.

In June 2006, the FASB issued FinancialInterpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes, anInterpretation of FASB Statement No. 109,” which clarifies the accounting foruncertainty in income taxes recognized in an enterprise’s financial statementsin accordance with FASB Statement No. 109, “Accounting for Income Taxes.”  This Interpretation prescribes a recognitionthreshold and measurement attribute for the financial statement recognition andmeasurement of a tax position taken or expected to be taken on a taxreturn.  This Interpretation alsoprovides guidance on de-recognition, classification, interest, penalties, accountingin interim periods, disclosure and transition. The evaluation of a tax position in accordance with this Interpretationwill be a two-step process.  The firststep will determine if it is more likely than not that a tax position will besustained upon examination and should therefore be recognized.  The second step will measure a tax positionthat meets the more likely than not recognition threshold to determine theamount of benefit to recognize in the financial statements.  This Interpretation is effective for fiscalyears beginning after December 15, 2006. Upon adoption in fiscal 2008 we do not anticipate that FIN 48 will havea material impact on our financial statements.

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**CORPORATE INFORMATION**
| **DIRECTORS**                                                                                                                                                            | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
|                                                                                                                                                                     |       |
| Cornelius C.  Vanderstar                                                                                                                                                 |       |
| Chairman of the  Board                                                                                                                                                   |       |
|                                                                                                                                                                     |       |
| Ronald L. Rudy                                                                                                                                                           |       |
|                                                                                                                                                                     |       |
| John P.  Cunningham                                                                                                                                                      |       |
| Retired  President of International Aluminum Corporation                                                                                                                 |       |
|                                                                                                                                                                     |       |
| Alexander L.  Dean                                                                                                                                                       |       |
| President, David  Brooks Company                                                                                                                                         |       |
|                                                                                                                                                                     |       |
| Joel F. McIntyre                                                                                                                                                         |       |
| Attorney At Law                                                                                                                                                          |       |
|                                                                                                                                                                     |       |
| Norma A.  Provencio                                                                                                                                                      |       |
| President,  Provencio Advisory Services, Inc.                                                                                                                            |       |
|                                                                                                                                                                     | ** ** |
| David C. Treinen                                                                                                                                                         |       |
| Retired  President of International Aluminum Corporation                                                                                                                 |       |
|                                                                                                                                                                     |       |
| **STOCK  TRANSFER AGENT AND REGISTRAR**                                                                                                                                  | ** ** |
|                                                                                                                                                                     |       |
| Continental  Stock Transfer & Trust Company                                                                                                                          |       |
| 17 Battery Place                                                                                                                                                         |       |
| New York, NY  10004                                                                                                                                                      |       |
| (212) 509-4000                                                                                                                                                           |       |
| Internet at  www.continentalstock.com                                                                                                                                    |       |
| ** **                                                                                                                                                               | ** ** |
| **STOCK  EXCHANGE LISTING**                                                                                                                                              | ** ** |
|                                                                                                                                                                     |       |
| The Company’s  common stock (trading symbol: IAL) is listed on the New York Stock Exchange                                                                          |       |
|                                                                                                                                                                     |       |
| **OFFICERS**                                                                                                                                                             |       |
|                                                                                                                                                                     |       |
| Ronald L. Rudy                                                                                                                                                           |       |
| President & Chief Executive Officer                                                                                                                                  |       |
|                                                                                                                                                                     |       |
| Mitchell K. Fogelman                                                                                                                                                     |       |
| Senior Vice President — Finance & Secretary                                                                                                                     |       |
|                                                                                                                                                                     |       |
|                                                                                                                                                                     |       |
| William G. Gainer                                                                                                                                                        |       |
| Senior Vice President — Operations                                                                                                                                  |       |
|                                                                                                                                                                     |       |
| Susan L. Leone                                                                                                                                                           |       |
| Vice President — Human Resources                                                                                                                                    |       |
|                                                                                                                                                                     |       |
| **FINANCIAL INFORMATION ON CORPORATE WEBSITE**                                                                                                                           |       |
|                                                                                                                                                                     |       |
| The Company makes available on its website,  www.intlalum.com, its periodic reports on Form 10-K and 10-Q as soon as reasonably  practicable after they have been filed. |       |
| ** **                                                                                                                                                               |       |
| **ELECTRONIC TRANSFER OF DIVIDENDS**                                                                                                                                     |       |
|                                                                                                                                                                     |       |
| For information and forms, write to:                                                                                                                                     |       |
| Corporate Secretary                                                                                                                                                      |       |
| International Aluminum Corporation                                                                                                                                       |       |
| P. O. Box 6                                                                                                                                                              |       |
| Monterey Park, CA 91754                                                                                                                                                  |       |
| ** **                                                                                                                                                               |       |
| **ANNUAL SHAREHOLDERS MEETING**                                                                                                                                          |       |
|                                                                                                                                                                     |       |
| 2 p.m., Thursday, October 26, 2006                                                                                                                                       |       |
| International Aluminum Corporation                                                                                                                                       |       |
| 767 Monterey Pass Road                                                                                                                                                   |       |
| Monterey Park, CA 91754                                                                                                                                                  |       |

 

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| **SUBSIDIARIES BY SEGMENT**                                   |       |
|---------------------------------------------------------------|------------|
| ** **                                                    | ** ** |
| **COMMERCIAL**                                                | ** ** |
| * *                                                      | * *   |
| *Douglas R. Ellerbrock*                                       | * *   |
| *Executive Vice President*                                    | * *   |
| *Commercial Products Group*                                   | * *   |
|                                                          |       |
| United States  Aluminum Corporation                           |       |
| Vernon, California                                            |       |
| Phoenix, Arizona (opening Fall 2006)                          |       |
|                                                          |       |
| United States  Aluminum Corporation-Illinois                  |       |
| Bedford Park, Illinois                                        |       |
| Boston, Massachusetts                                         |       |
| Detroit, Michigan                                             |       |
|                                                          |       |
| United States  Aluminum Corporation-Texas                     |       |
| Waxahachie, Texas                                             |       |
| Denver, Colorado                                              |       |
| St. Louis, Missouri                                           |       |
| Dallas, Texas                                                 |       |
| Houston, Texas                                                |       |
|                                                          |       |
| United States  Aluminum Corporation-Carolina                  |       |
| Rock Hill, South Carolina                                     |       |
| Orlando, Florida (opening Fall 2006)                          |       |
| Atlanta, Georgia                                              |       |
| Baltimore, Maryland                                           |       |
|                                                          |       |
| United States  Aluminum Of Canada–British Columbia, Ltd. |       |
| Langley, British Columbia, Canada                             | ** ** |
|                                                          |       |
| United States  Aluminum Of Canada–Ontario, Ltd.          |       |
| Guelph, Ontario, Canada                                       |       |
|                                                          |       |
| Raco Interior  Products, Inc.                                 |       |
| Houston, Texas                                                |       |
| Waxahachie, Texas                                             |       |
| Dallas, Texas                                                 |       |
|                                                          |       |
| **RESIDENTIAL**                                               |       |
| * *                                                      |       |
| *George  L. Hall*                                             |       |
| *Executive  Vice President*                                   |       |
| *Residential  Products Group*                                 |       |
|                                                          |       |
| International Window Corporation                              |       |
| South Gate,  California                                       |       |
|                                                          |       |
| International Window-Northern California                      |       |
| Hayward,  California                                          |       |
|                                                          |       |
| International Window-Arizona, Inc                             |       |
| Phoenix, Arizona                                              |       |
|                                                          |       |
| **ALUMINUM EXTRUSION**                                        |       |
|                                                          |       |
| International Extrusion Corporation                           |       |
| Alhambra,  California                                         |       |
|                                                          |       |
| International Extrusion Corporation-Texas                     |       |
| Waxahachie,  Texas                                            |       |

 

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| **International Aluminum Corporation** |
|----------------------------------------|
| ** **                             |
| 767 Monterey  Pass Road                |
| Monterey Park,  California 91754       |
| Tel:                                   |  (323)  264-1670 |
| Fax:                                   |  (323)  266-3838 |
| Web:                                   |  www.intlalum.com |

 

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